Which of the following statements best describes the IRR method?
A) One defect of the IRR method is that it does not take account of cash flows over a project's full life.
B) One defect of the IRR method is that it does not take account of the time value of money.
C) One defect of the IRR method is that it does not take account of the cost of capital.
D) One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

Question

Quizplus · Accepted Answer

The IRR method assumes that the cash flows to be received from a project can be reinvested at the IRR itself, which is often not valid. This is a major defect of the IRR method because it can lead to incorrect investment decisions. The other options listed are not appropriate descriptions of the IRR method.

Which of the Following Statements Best Describes the IRR Method